A traditional business loan can be hard to get without collateral. A bank usually requires some sort of asset – such as real estate or equipment – which you agree to surrender if you are unable to pay the loan. The requirement of collateral to secure a bank loan can be frustrating for business owners who are just starting out or who do not own any significant assets.
Small business loans with no collateral are especially difficult to get for those with bad credit scores. In addition, getting a bank loan takes time, so a loan without collateral can be even more difficult if you need the funds quickly.
However, traditional bank loans are not the only means available for getting business financing. There are several types of business loans that require no collateral, and many are faster to acquire than traditional bank loans.
Types of Non-Collateral Business Loans
The key to getting a business loan without collateral is to go through alternative lenders. These lenders offer several types of small business loans with no collateral:
Merchant Cash Advance: Also known as credit card factoring, a merchant cash advance refers to a type of financing in which a lender provides money up front, and takes repayment by automatically deducting a percentage of your business’ future credit card sales. Typically, a business can receive credit card factoring if they have 4-6 months of credit card sales revenue history that a merchant cash advance provider can review. While it is more expensive than traditional business loans, merchant cash advance is an option for a startup business loan with no collateral that can provide funds quickly.
Accounts Receivable Financing: Also known as “factoring,” this is similar to a merchant cash advance. Accounts receivable financing gives you working capital ahead of time-based on upcoming payments from your customers’ accounts. You sell your open invoices (accounts receivable) to a third party called a “factor” for a percentage of their value upfront (usually 80% to 90%). Accounts receivable financing is a no collateral business loan option that can come in handy if you need to purchase inventory or supplies to fulfill open orders.
Equipment Loan: Technically, an equipment loan is a collateral-based loan because the equipment purchased is used as collateral. The difference is that the collateral used to acquire the loan is purchased with the funds from the loan, so no prior existing asset is required. For many business owners, this is very different than a loan that uses the borrower’s personal property as a guarantee or asks for a business’s assets as collateral.
Pros and Cons of Alternative Loans
The main advantages of alternative lenders are speed and availability.
It is much quicker to get financing from alternative lenders than from banks. While a bank can take 1-2 months to give you an answer on a loan application, an alternative lender can make a decision in just a few days.
Alternative lenders offer financing to more businesses as well because they base lending decisions on cash flow rather than credit score and collateral. Alternative lenders calculate that your ability to pay back a loan is better predicted by verifiable future income than it is by your credit score.
The main downside of alternative lenders is the rates. Because lenders are taking on more risk without securing any collateral as an insurance for their investment, they must charge a higher interest than a bank.
If you are interested in getting a business loan without collateral, there are many options to choose from here at Lendio. Using our simple form, you quickly answer a few questions about your business, and we match you with business loans with the best rates.